Is Your Fantasy League a Federal Crime?

Fantasy sports were once a fringe activity, confined to small groups of friends, and shunned by professional leagues like the NFL. They have since transformed into a billion dollar industry and a major source of revenue for the same leagues that once spurned it. It is nearly as popular as the game on the field, and is only getting bigger.

But is it legal? And if so, why?

Anthony N. Cabot

It’s no secret that fantasy sports leagues often have more riding on them than pride. Entry fees are often pooled into a pot reserved for the league’s champion. It sounds a lot like sports gambling which is illegal in every state but Nevada.

So is your office league a federal or state crime? Maybe.

The Legal Blitz caught up with Anthony N. Cabot, a partner and gaming group leader at Lewis and Roca LLP. Cabot practices in the areas of gaming law and internet gambling. He has specifically written on the issue of fantasy sports in law review articles, Fantasy Sports: One Form of Mainstream Wagering in the United States, 40 J. Marshall L. Rev. 1195, and Alex Rodriguez, a Monkey and the Game of Scrabble: The Hazard of Using Illogic to Define Legality of Games of Mixed Skill and Chance, 57 Drake L. Rev. 383.

What conditions must a fantasy sports league meet to be exempt from the Unlawful Internet Gambling Enforcement Act of 2006, (UIGEA) and what is the basis for the exemption?

Fantasy sports are exempted from the definition of unlawful Internet gambling provided that they are:

Not based on the current membership of an actual sports team or on the score, point spread or performance of teams;

All prizes and awards are established and made known before the start of the contest;

Winning outcomes are based on the skill of the participants and predominately by accumulated statistics of individual performances of athletes, but not solely on a single performance of an athlete.

The public is often confused, however, as to the impact of this provision. It simply means that fantasy sports leagues that comply with these prongs are exempt from UIGEA, not that they are necessarily legal. To be legal, the contest still needs to comply with other Federal and state laws. UIGEA was not intended to make legal activities that are prohibited by other laws.

The second prong of the exemption seems problematic for many leagues. Assume I start a league with an initially undetermined amount of teams. If I require each owner to put $10 into the winner’s pot, am I breaking federal law?

You would be correct in stating that such contests could be problematic, but they are not necessarily a violation of Federal law. As a general matter, I think including this prong in the test allowing an exemption was ill-advised. It resulted from a minority position held by some states that even skill-based games are illegal if they use a pari-mutuel style to determine payouts. In other words, in these states, even skill contests had to have a fixed prize regardless of the number of entrants. I am not certain why this is important from a policy perspective. I am not sure if this was well thought out.

Nevertheless, not meeting this prong does not necessarily mean that these pari-mutuel based fantasy sports contests are illegal, only that they are now subject to the Act. As a result they could result in a violation of UIGEA if they are conducted in states that prohibit fantasy sports or prohibit such contests that use a pari-mutuel format for awarding prizes. Remember that a violation of UIGEA occurs where the site is engaged in the business of betting or wagering and knowingly accepts payments directly or indirectly from a player in relationship to unlawful Internet gambling (i.e. bets that are unlawful under other state or Federal laws). So, there still needs to be a violation of a gambling law to be illegal under UIGEA.

Can you talk about the NFL’s lobbying efforts to get a fantasy sports exemption under the UIGEA?

For about 30 years, the National Football League distanced itself from fantasy football because of the connotation that it was a form a gambling. According to an official spokesperson for the NFL “years back, there was a misconception of what fantasy football really was, … It had gambling connotations, and for a long time that put us off a bit. But once we took a good look at what the game actually involved and the kind of information that was required to be successful, we realized it wasn’t a gambling activity, and that helped move us past some hurdles.”[1]

What may have helped them more in their thinking was the growing popularity of fantasy sports and the prospects to financially share in that popularity. The future of Fantasy sports would have been placed in jeopardy if Congress passed Internet gaming legislation that could have been read to prohibit fantasy sports. Moreover, Fantasy sports helps to maintain the increased viewership by those that played fantasy sports.

Former Senator Bill Frisk (R-TN) was instrumental in the passage of the IUGEA, which included the exemption for fantasy sports. (Courtesy Multinational Monitor)

Not surprisingly, the NFL played a major role in the passage of UIGEA. According to a New York Post article: “the National Football League used a big bucks lobbyist to ram through Internet gambling-curbing legislation in the final minutes of the legislative session, sources revealed. But opponents of the bill charge that the NFL broke the rules when it fast-tracked legislation that never even got a vote in the Senate – a trick play that provided a big exemption for fantasy football. The NFL runs its own fantasy football site, and gets royalties from others.”[2] Ultimately, however, the royalties angle fizzled as a Federal court, in a decision from August of 2006, held that fantasy operators do not need to pay licensing fees to the sports leagues to use the statistics of players in that league.

While exempt from the UIGEA, fantasy sports are still subject to state gambling laws. How do courts determine if a specific game is considered gambling?

Yes, not only state laws but other Federal laws as well. Specifically, from a state law perspective, a site needs to comply with the laws in each state where it accepts participants into a fantasy contest. Most states have laws both against games of chance and against betting on the outcome of future contingent events not within your control. To accommodate the variety of traditional skill games, a common law definition of gambling in the United States arose that prohibited only those activities where a person pays consideration, usually cash, for the opportunity to win a prize in a game of chance. Games of chance are generally illegal; whereas games of skill are generally legal. Unfortunately, the states do not follow identical rules are to what constitutes a game of chance versus a game of skill.

Skill contests generally include games where the result depends on the exercise of skill elements such as quickness or acuteness of sense perceptions; intellect, accrued knowledge, keenness of discernment or penetration with soundness of judgment; shrewdness; or the ability to see what is relevant and significant.

But most games and contests have some element of chance – even chess, where the draw determines who moves first. Therefore, most state governments set rules regarding the legality of games where the outcome could be influenced by both the skill of the participants and chance outside of their control. These are called games of mixed chance and skill.

Most states follow the predominance test. Simply, games of pure chance like bingo, slot machines and the like are illegal. Games of pure skill are legal. In games of mixed chance and skill, the gambling prohibition only reaches to those activities where chance is the predominate factor. In other words, the presence of chance becomes significant only where it plays a greater role in the outcome than skill. Hence, the name “predominance test” is commonly used.

Unfortunately, the predominance test is not the only test used in the United States. In about nine states, courts examine the element of chance by determining whether chance is a material element affecting the outcome of a particular game. Such a test recognizes that although skill may primarily influence the outcome of a game, a state may prohibit wagering on the game if chance has more than an incidental effect on the game. This test is more subjective. The court determines the level of chance in a particular game and makes a judgment as to when that chance becomes material to the outcome.

A few other states analyze the role chance plays in a game by determining whether a particular game contains any chance that affects the outcome of the game. As virtually every game has some element of chance, most skill games may not survive scrutiny in these states.

Because fantasy sports involve some level of chance, the operator must assure that they meet the tests in each state where offered.

A second set of laws prohibit betting against betting on the outcome of future contingent events not within your control.

These prohibitions are typically stated applying to “staking or risking something of value upon the outcome of a contest of chance or a future contingent event not under the person’s control or influence.”[3] The difference between wagering and most other gambling/lottery laws may be explained as follows: notwithstanding a state’s exclusion of skill gaming from its general gambling prohibitions, if a contestant wagers on someone else’s skill, not his or her own, a wagering violation may have occurred. For example, in those states that have adopted the predominance test, a player in a chess tournament can probably wager on his or her own performance by paying an entry fee into a contest in which he or she hopes to finish first, but cannot normally wager on the expected performance of someone else in that chess tournament.

Therefore to be legal, a fantasy sports contest must involve such immersion by the participants that it can be conclusively argued that they are relying on their own skills to control the outcome of the contest. This may be difficult in a weekly football contest where you simply pick a number of position players.

What are the arguments for and against classifying fantasy sports as a game of skill rather than chance?

In the majority of those jurisdictions that use the predominance test, at most forms of fantasy sports are arguably a game of skill. In particular, fantasy sports require skill on the part of contest participants to assess players and decide their worth in relation to such players’ expected performance over the season.

In support of the argument that fantasy sports are skill-based, contestants use their skill and knowledge of the sport and the fantasy sports rules to create and manage their own fantasy team of players who will accumulate the most points.

The skill elements are found primarily in three separate aspects of the game; drafting, playing and trading players. Arguably, drafting is the most skillful of the three aspects. Most fantasy leagues have multiple teams but only allow actual athletes to be drafted by a single fantasy team. This requires the fantasy owner to first assess the relative worth of each player in light of the scoring criteria used by the league and the theoretical evaluation of the players prospective accumulated statistics over the course of the contest. For example, you will need to evaluate a baseball player’s anticipated statistics for multiple categories such as batting average, home runs, RBIs, runs scored, and stolen bases. The fantasy owner has a wealth of statistics from past seasons on which to predict future performances, but these need to be analyzed in light of factors such as age, statistical trends, injuries, the player’s statistics in particular stadiums, and the quality of the player’s team mates and how that might effect performance and playing time. The players are then assessed a value in the draft process. This process is not unlike the process that general managers of major league teams must undertake in accessing player talent and constructing a team that maximizes the talent within a given payroll.

The team owner also must overcome team biases and prejudice and understand its relationship to the fantasy game. For example, the team owner must avoid over rating players that play for his favorite team and underrating other players because they play for a disfavored team. Arguing that accessing sports talent is not a skillful activity is belied by the fact that the sports industry recognizes and monetarily compensates successful general managers.

The fantasy team owner must develop a strategy to create a team that is balanced in a manner that is consistent with the team’s overall strategy. This strategy is not only important in the draft stage, but extends to the management of the team through the course of the season. For example, drafting all homerun hitters may advantage the team in the categories of home runs and RBIs, it will likely disadvantage the team in batting average, stolen bases and runs scored. Moreover, this balance is not only important from a category perspective, but also from a seasonal perspective. For example, some baseball players perform better in the second half of the season than the first half. Moreover, because teams are rarely balanced or complete after the draft, this strategy needs to extend to adding, releasing and trading players throughout the course of the season. Therefore, the fantasy owner may want to assure that either his team has both early and late season performers or has a trading strategy to accommodate seasonal deviations.

Third, the fantasy owner must use strategy in accessing the other team owners. For example, do you risk bidding on players that you really do not want to drive their price up so as to reduce the amount of money that other teams have to bid on players that you want?

Fourth, the team owner must prepare to make adjustments in the course of the draft to accommodate the players chosen and the price paid.

After the draft, the team owner must manage the team over the course of the season. This involves trading, determining which players to play, and dropping and adding players. This involves consistent review of play and statistics to assess performance swings, injuries and difficulty of schedule. This may involve researching or otherwise obtaining better information than one’s opponents. Research can include watching or listening to sports shows, monitoring hometown newspapers, watching games, reading expert commentary, subscribing to injury reports, trending player performances, watching match ups and other research methods. The existence of significant literature on fantasy sports, the valuation of players, and strategies for playing attest to at least the assertion by those that participate that skill is a critical element to the game.

Once trading begins, the negotiation skills of the various team owners are important. Negotiation skills include understanding the other team owner’s needs, overall strategies, the impact of the trade on both teams and simply good trading skills, including bluffing. Likewise, adding and dropping players requires vigilance in knowing who is available, what their performance potential may be, and how that potential may help the performance of your team.

The totality of these skill elements would have to be overcome by the chance elements involved in fantasy sports. Opponents may argue that fantasy sports contests involve more chance than skill because while the performance of athletes depends upon skill, attempts by third parties to predict the future performances of athletes involve chance guesses because fantasy sports contestants lack the ability to control the performances of athletes. The most significant chance element is injury or other circumstance that would prevent the player from performing. A loss of a high priced or early draft choice places the fantasy team at a significant disadvantage. For instance, while a participant can draft or trade for the most talented athletes, the chance of injury to those athletes may eliminate his or her opportunity to win. This would be particularly significant in a fantasy sports league where the number of players is small, such as basketball, or where a single skilled position player can account for significant statistics. Furthermore, the unpredictability of betting on sporting events also has been attributed to “the weather, the health and mood of the . . . [athletes] and the condition of the playing field.”[4]

Does the balance of these factors determine whether Fantasy Sports are a game of skill or chance? The answer is simply not definable outside the context of the individual fantasy game being examined.

How do the scoring and prize rules of a fantasy sports league determine its legality?

Every variation has to be analyzed in light of the state where the game is being offered. As previously noted, a pari-mutuel method of determining the prize award is going to be problematic in several states. Likewise, short duration contests may both increase the chance involved and the argument that the contestant is merely betting on things outside his control.

Why is online poker illegal under this same logic? Doesn’t it require skill as well?

Courtesy Forbes.com

Historically, there has been some diversity in the classification of poker by court opinions. There are older state court opinions that support classifying poker as either a game of chance or a game of skill. The Supreme Courts of Montana and Oregon have held that poker is a game of skill “with one player pitting his skills and talents against those of other players.” In contrast, the Supreme Court of Ohio has held that poker is a game of chance. In response to court opinions that classify poker as a skill game, some state legislative bodies passed statutory prohibitions on poker or card games in general, or changed the threshold for finding the gambling element of chance in order to include poker as a prohibited game. Likewise, the courts in New York have identified poker as a game of chance within the context of gambling prohibitions, even though there may be some significant skill involved in the game.

In states that use the predominance test, the legality of poker may depend on the type of poker game played and how it is played. Some forms of poker take less skill than others. Likewise, a skilled poker player has a better opportunity to demonstrate skill in a tournament as opposed to a single hand.

What is the Professional and Amateur Sports Protection Act (PASPA), and how might it challenge fantasy sports?

On June 26, 1991, the Senate Judiciary Subcommittee on Patents, Copyrights and Trademarks held public hearings on Senate Bill 474. As a result, Congress found that “[s]ports gambling is a national problem. The harms it inflicts are felt beyond the borders of those States that sanction it.” Moreover, the Senate Judiciary Committee agreed with the testimony of ”David Stern, commissioner for the National Basketball Association, that ‘[t]he interstate ramifications of sports betting are a compelling reason for federal legislation.’”Based on these findings, Congress exercised its authority under the Commerce Clause to enact the Professional and Amateur Sports Protection Act in 1992,codified at 28 U.S.C. § 3701, et seq.

PASPA makes it unlawful for:

(1) a government entityto sponsor, operate, advertise, promote, license, or authorize by law or compact, or

(2) a person to sponsor, operate, advertise, or promote, pursuant to the law or compact of a governmental entity, a lottery, sweepstakes, or other betting, gambling, or wagering scheme based, directly or indirectly (through the use of geographical references or otherwise), on one or more competitive games in which amateur or professional athletes participate, or are intended to participate, or on one or more performances of such athletes in such games.

Because some states already had state-authorized sports wagering, exceptions were crafted to allow them to continue. These exceptions apply to the states of Nevada, Oregon, Delaware and Montana.

By reading PASPA literally, an argument can be made that a person only violates PASPA if he or she operates sports wagering that is specifically authorized by state law (“pursuant to the law . . . of a governmental entity”). Corollary to that argument, a person would not violate PASPA if the skill game is not expressly authorized by state law but merely exempted from gambling prohibitions as a result of lacking the element of chance.

But, there are extremely few cases and attorney general opinions on PASPA, and none that I am aware of have evaluated a fantasy sports contest or sports sweepstakes under PASPA. Until a prosecutor brings charges against a privately-sponsored fantasy sports operator, it is difficult to conclusively opine on the validity of this argument.

Have there been any cases where the court has found fantasy sports to be illegal gambling?

No. Given the prevalence of fantasy sports, the lack of legal precedence is surprising. No reported Federal or state cases discuss the legality of the activity. The only discussion of the legality of fantasy sports is found in three Attorney General Opinions, one each from Arizona, Florida, and Louisiana that have concluded that fantasy sports was illegal games of chance. For various reasons, these Opinions provide very little guidance.

First, these three attorney general opinions originated in jurisdictions that have been historically very conservative on most gambling issues (i.e., Arizona, Florida, and Louisiana) and prohibit wagering on most games of skill. Indeed, most skill game operators typically exclude these three jurisdictions, because they are perceived as following the Any Chance Test. As such, even if supported, these attorney general opinions would not likely be followed in the majority of states that follow the predominance factor test.

Second, while attorney general opinions are persuasive authority in their home states, courts are still free to make up their own minds about the construction of their state gambling laws. Indeed, many of the cases discussed in this article were the result of a court having a completely different opinion about the meaning of gambling laws than the local attorney general. To date, there are no reported court cases that have squarely addressed the skill component in fantasy sports.

No case has definitively found that fantasy sports are legal. A case in New Jersey, however, found that fantasy sports did not constitute a “bets or wager” for purposes of a statute that allowed recovery of such because (i) the entry fees were paid unconditionally, (ii) the prizes offered by the fantasy sites were for set amounts and were guaranteed to be awarded, and (iii) the sites themselves did not compete for prizes. The court, however, did not go as far as to say that the sites were legal.

Is anyone really going to enforce this? Do fantasy owners need to worry about being shut down?

Some operators push the limits of what can be reasonably called “fantasy sports.” Some prosecutors may see a single Sunday football “fantasy contest” as nothing more than a parlay card based on player performance. These short contests will become the more likely targets if prosecutions occur.

Understanding how a court determines the legality of a skill game is essential, but it’s knowledge you would always prefer not to have to apply in court. Once you decide to offer skill games in which contestants can risk money to win cash or other prizes, your goal should be to take precautions to avoid controversy and legal scrutiny altogether.

The first step in this preparation is to review each proposed fantasy contest and method of play to determine if it requires sufficient skill levels.

After deciding that the fantasy contest may be defendable, the next step is to conduct a 50-state review. This review will look at the type of contest and the method of play, including entry fees and prizing. Legal counsel will review the case law, statutes, attorney general opinions, and other available legal materials for each state individually. These materials will be analyzed in light of the type of contest and method of play. Legal counsel will then categorize the risk associated with offering the contest to persons physically located in each state. Ultimately, the company must look at the results of this survey and decide those states from which the site will accept contestants and those it will not.

Unfortunately, a site cannot simply post notice that persons from certain states are ineligible. If a site knows or should know that a contestant is from a prohibited state, the site can be criminally liable even with a general disclaimer. Instead, the site must undertake a compliance program designed to affirmatively prevent persons from prohibited states from wagering on the site. No specific procedures are mandated, but sites have implemented several measures to meet the legal requirements. The registration process is only the first source of information regarding the physical location of a prospective contestant. This information is subject to verification through the use of geo-blocking software, address verification services, and credit verification services. Some sites also require proof of government identification before issuing prizes.

Whatever the methodology, the goal is to create a system to identify and exclude prohibited persons. This system needs to be audited and tested for exceptions. If a person from a prohibited state gains access, the company’s compliance program must have procedures for immediately implementing remedial procedures. In addition, the company’s commitment to compliance should be reflected in written policies and employee training.

What future trends do you see for fantasy sports and gaming law?

I do not anticipate a lot from a legal perspective as it relates to true fantasy sports leagues. Fantasy sports has gained legitimacy over the past 20 years and is likely to have a bright future. I do worry, however, that some fantasy operators may sully the industry by becoming too aggressive in what they represent as fantasy sports and subsequently being targeted for enforcement action.

As to other types of gambling, unfortunately, with the exception of Nevada, true sports wagering is unlikely to be permitted in any state without the repeal of PASPA (unlikely) or a court find PASPA to be unconstitutional (expect a possible challenge from the State of New Jersey). This is such a massive underground industry that escapes taxation and regulation. This, coupled with the lack of law enforcement of illegal sports wagering, is perplexing.

Poker on the other hand is inevitable. If the Federal government does not come up with a scheme for online poker, the states will certainly begin to legalize it on an intrastate basis in the next few years.